According to the Fisher hypothesis, if the real interest rate is 5 percent and the inflation rate rises from 2 percent to 4 percent, then the nominal interest rate will _____percentage points and the real interest rate will change by ______percentage points.
A)rise by 0; ?2
B)fall by 2; ?2
C)rise by 2; 0
D)fall by 1; 1

Question

According to the Fisher hypothesis, if the real interest rate is 5 percent and the inflation rate rises from 2 percent to 4 percent, then the nominal interest rate will _____percentage points and the real interest rate will change by ______percentage points. 
A)rise by 0; ?2
B)fall by 2; ?2
C)rise by 2; 0
D)fall by 1; 1

Quizplus · Accepted Answer

According to the Fisher hypothesis, the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate. Thus, if the real interest rate is 5 percent and the inflation rate rises from 2 percent to 4 percent, the expected inflation rate increases by 2 percentage points. Therefore, the nominal interest rate will rise by 2 percentage points (5% + 2% = 7%). The real interest rate will remain unchanged at 5% because it is determined by the difference between the nominal interest rate and the inflation rate (5% = 7% - 2%). Therefore, the best choice is (C) rise by 2; 0.

According to the Fisher Hypothesis, If the Real Interest Rate